Now that summer is officially over and many routines begin to be brought into the normal sphere, it is important to start off the next few months as fresh as possible. On You Tube, if desired besides many entertainment venues there are opportunities to learn things. If you think about short sellers, one of the prime names which comes up is Jim Chanos of the Kynikos Associates firm.

Mr. Chanos is a choice speaker for conferences because he looks at the market from what could come apart. Most of us look at the markets to see how much money we can make over the short and long-term. However just because a stock is on the stock market, it does not mean the company will not and has not stretched the line between legal and illegal. When companies are making money, all is good. When companies do not make enough money, the first instinct is to buy time to get their business model working.

If you short, which Mr. Chanos recommends you do not, the most important thing is after you have done your extensive homework and have the courage of convictions, you are well diversified. Even if you are right, but the market does not agree for now, you may lose money. Many investors have to agree with your ideas. Mr. Chanos’ firm sees shorts as insurance to make your longs reward you more.

There are always companies which stretch the truth because the model is not doing as well as the executives think it should be. Mr. Chanos noted there was a fine line between putting the company’s best foot forward and crossing the line to embellish or fraud. It happens more than you think it should and it past surveys of CFO’s when the person could not be identified, 2/3’s admitted the topic has come up and they were pressured to do so.

There are always some easy themes which Mr. Chanos’ firm examines:

Booms that go bust -Cash flows do not service the debt. Eventually something will happen

Real Estate bubbles  – we all want our real estate to go up in price but when is it too high too soon?

Technological obsolesces – business models which were great for a while, changed think about Kodak, Blockbuster Video, Record Stores

Growing by acquisitions – when a company buys another many times it does not work out, so accounting begins to see fraud to seemingly make it work.  some examples have been Baldwin United, WorldCom, Enron, Sunbeam, etc

Consumer Fads – the public latches on something,  a few months later they have move on to the next fad

Visionaries – some will be correct and change the world, most will not.

Movement of Senior Executives – people move between jobs, that is a good thing. For a company you have wonder when the senior level of people move more than normal. At the senior levels, one would expect people have a broader picture of information about the company. If they are moving to get out, then eventually the President and CEO need to be replaced and that means stock price falls for a time.

Linking to dividend paying stocks, when you buy these types of companies ensure you understand how they make a profit and can continue to pay you a dividend. As long as they continue to make a profit, the other companies will make wonderful reading in the press, but not necessarily great investments. You need to have a keen sense of skepticism of high flying companies, but remember ask how do they make a profit?

There are more questions than answers, till the next time – to raising questions.